Oct. 16 (Bloomberg) -- Cnooc Ltd., working to complete the
biggest overseas takeover by a Chinese company, is slicing
borrowing costs by 80 percent as it attracts international
lenders seeking exposure to government-backed businesses.

The country’s largest producer of offshore crude oil agreed
to pay $15.1 billion in July to buy Canada’s Nexen Inc. and is
seeking $6 billion in bank debt to finance the transaction. It’s
offering 80 basis points over the London interbank offered rate
for the 12-month loan, on which banks have been asked to respond
this week. That’s 487 basis points less than China’s 6 percent
benchmark lending rate and 332 below the average 4.45 percent
Cnooc pays on its bonds.

“Ultra high-grade Chinese companies like CNOOC make
strategic acquisitions from time to time, and can always easily
achieve very competitive loan pricing,” said Joe Cheung, a vice
president in Credit Suisse Group AG’s Asia-Pacific emerging
markets financing group in Hong Kong. “Having government
ownership and policy support also makes international banks
comfortable and confident to lend.”

Overseas takeovers by Chinese companies have climbed 19
percent to $60.4 billion this year as borrowing costs have
fallen, according to data compiled by Bloomberg. Cnooc is
looking offshore for cheaper funds, as global lenders vie for
business with some of the world’s most active acquirers.

‘More Opportunities’

“Now that state-owned enterprises in China are stepping
out onto the world stage there are more opportunities for
international banks to build relationships with them,” said
David Yim, head of debt capital markets in Hong Kong at The
Royal Bank of Scotland Group Plc.

Cnooc, rated at Aa3, Moody’s Investors Service’s fourth-highest investment grade, is seeking oil reserves to meet demand
in the world’s second-biggest crude-consuming nation. People’s
average use of the fuel in China leapt 90 percent in the decade
through last year. Buying Calgary-based Nexen will hand Cnooc
control of oil and gas assets in the North Sea, the Gulf of
Mexico and in Nigeria, as well as oil-sands reserves at Long
Lake, Alberta, where the Beijing-based company already produces
crude in a joint venture with the explorer.

The number of non-Chinese lenders among the top 25
arrangers of syndicated loans in the country rose to 17 this
year from 13 in 2009, led by Mizuho Financial Group Inc. and
Credit Suisse, Bloomberg-compiled data show.

Offshore Advantage

Cnooc joins Bright Food Group Co., Dalian Wanda Group Corp.
and China Three Gorges Corp. in acquiring assets offshore as
growth at home slows. China’s gross domestic product expanded
7.6 percent from a year earlier in the second quarter, down from
8.1 percent in the first three months, according to official
data. The International Monetary Fund estimates economic growth
will slow to 7.8 percent this year from 9.3 percent in 2011.

The cooling economy has prompted China’s central bank to
cut reserve requirements and pump record amounts of funds into
the financial system. While that has lowered borrowing costs,
regulations mean top-rated companies may still have to pay more
to source money than they would offshore, according to RBS’s
Yim.

“The interest rate for yuan loans onshore is regulated so
in a way, if you’re a good-quality Chinese company, you’re
probably paying more than what your company’s credit should
command,” Yim said. “Besides, the offshore U.S. dollar market
is a lot deeper and more liquid than the U.S. dollar market
onshore in China.”

Cheaper Borrowing

The average margin over Libor is 265 basis points, or 2.65
percentage points, for U.S. dollar-denominated loans in the
Asia-Pacific region outside Japan that were signed this year and
mature before January 2016, Bloomberg data show. The Chinese
central bank’s best lending rate is 6.4 percent for similar-maturity debt, rising to 6.55 percent for longer than five years
and falling to 6 percent for 12-month loans.

Lenders don’t have to charge 100 percent of the rates set
by the central bank. The PBOC has taken steps to liberalize
interest charges, widening the permissible lending-rate discount
to 30 percent in July and trimming interest rates further after
cutting them the previous month for the first time since 2008.

Even with a 30 percent discount applied to the central
bank’s benchmark rate, the starting margin Cnooc is offering for
its $6 billion loan is still 307 basis points lower. Cnooc is
considering eventually refinancing the bridge loan with proceeds
from a bond sale, two other people familiar said Sept. 11.

Default Swaps

Michelle Zhang, a Beijing-based spokeswoman for Cnooc, said
the company is “currently in the process of external financing
for the Nexen deal” and declined to comment further.

Credit-default swaps insuring China’s sovereign debt
against non-payment for five years decreased 1.3 basis point to
80.3 yesterday, according to data provider CMA, which is owned
by McGraw-Hill Cos. and compiles prices quoted by dealers in the
privately negotiated market.

Credit-default swap indexes are benchmarks for insuring
bonds against default and traders use them to speculate on
credit quality. A drop signals improving perceptions of
creditworthiness, while an increase suggests the opposite.

‘Natural Progression’

The yuan touched 6.2580 per dollar yesterday in the spot
market, the strongest level since the government unified the
official and market exchange rates at the end of 1993, China
Foreign Exchange Trade System prices show. Twelve-month non-deliverable forwards declined 0.1 percent to 6.3619 as of 10:37
a.m. in Hong Kong, a 1.4 percent discount to the onshore rate of
6.2726, according to data compiled by Bloomberg.

The loan to Cnooc comes as syndicated lending in Asia slows
as companies face rising borrowing costs and opt for more
private, so-called bilateral facilities and bonds. Loans have
fallen 30 percent from the same period last year to $251.1
billion, the lowest amount for comparable periods since 2009,
Bloomberg data show.

State-owned enterprises in China are expanding overseas and
trying to diversify their funding sources, according to Atul
Sodhi, Hong Kong-based head of Asia-Pacific loan syndication at
Credit Agricole SA.

“Chinese companies are also wanting M&A advice and, as
they get bigger, are looking beyond loans and bonds to other
financial products,” said Sodhi, who is also chairman of the
Asia-Pacific Loan Market Association. “Having foreign lenders
in their relationship circle is a natural progression.”